Question

The following data provides a "real-world" illustration of adjusting GNP for changes in the price level (selected years, in billions of dollars). $$ \begin{array}{cccc} \text { Year } & \begin{array}{l} \text { Money, or } \\ \text { unadjusted GNP } \end{array} & \begin{array}{c} \text { Price level } \\ \text { index, percent } \end{array} & \begin{array}{c} \text { Adjusted } \\ \text { GNP } \end{array} \\ 1946 & \$ 209.6 & 44.06 & ? \\ 1951 & 330.2 & 57.27 & ? \\ 1958 & 448.9 & 66.06 & ? \\ 1964 & 635.7 & 72.71 & ? \\ 1968 & 868.5 & 82.57 & ? \\ 1972 & 1,171.5 & 100.00 & ? \\ 1974 & 1,406.9 & 116.20 & ? \\ 1975 & 1,498.9 & 126.37 & ? \end{array} $$ Determine the adjusted GNP for each year.

Short answer

The adjusted GNP for each year is as follows: 1946: 475.45 billion 1951: 576.48 billion 1958: 679.31 billion 1964: 874.25 billion 1968: 1051.90 billion 1972: 1171.50 billion 1974: 1210.64 billion 1975: 1186.38 billion

Step-by-step solution

Understand the concept of Adjusted GNP

Adjusted GNP (Gross National Product) is the value of the GNP adjusted for inflation or change in the price level. In this exercise, the Price level index given in percentage is used to adjust the unadjusted GNP for each year.

Calculate the Adjusted GNP for each year

To calculate the Adjusted GNP, we will use the following formula: Adjusted GNP = (Unadjusted GNP / Price Level Index) * 100 Apply this formula to calculate the adjusted GNP for each year in the table: Year 1946: Adjusted GNP = \(\frac{209.6}{44.06}\) * 100 = 475.45 billion Year 1951: Adjusted GNP = \(\frac{330.2}{57.27}\) * 100 = 576.48 billion Year 1958: Adjusted GNP = \(\frac{448.9}{66.06}\) * 100 = 679.31 billion Year 1964: Adjusted GNP = \(\frac{635.7}{72.71}\) * 100 = 874.25 billion Year 1968: Adjusted GNP = \(\frac{868.5}{82.57}\) * 100 = 1051.90 billion Year 1972: Adjusted GNP = \(\frac{1171.5}{100.00}\) * 100 = 1171.50 billion Year 1974: Adjusted GNP = \(\frac{1406.9}{116.20}\) * 100 = 1210.64 billion Year 1975: Adjusted GNP = \(\frac{1498.9}{126.37}\) * 100 = 1186.38 billion

Update the table with the calculated Adjusted GNP values

Now, add the calculated Adjusted GNP values for each year to the original table: $$ \begin{array}{cccc} \text { Year } & \begin{array}{l} \text { Money, or } \\ \text { unadjusted GNP } \end{array} & \begin{array}{c} \text { Price level } \\ \text { index, percent } \end{array} & \begin{array}{c} \text { Adjusted } \\ \text { GNP } \end{array} \\ 1946 & \$ 209.6 & 44.06 & 475.45 \\ 1951 & 330.2 & 57.27 & 576.48 \\ 1958 & 448.9 & 66.06 & 679.31 \\ 1964 & 635.7 & 72.71 & 874.25 \\ 1968 & 868.5 & 82.57 & 1051.90 \\ 1972 & 1,171.5 & 100.00 & 1171.50 \\ 1974 & 1,406.9 & 116.20 & 1210.64 \\ 1975 & 1,498.9 & 126.37 & 1186.38 \end{array} $$ These are the adjusted GNP values for each specific year.

Key concepts

Gross National Product

Gross National Product, or GNP, is an important economic metric that represents the total market value of all goods and services produced by the residents of a country in a given time period. This includes activities carried out both domestically and abroad. It differs from Gross Domestic Product (GDP), which only considers production within the country's borders.

GNP can be an indicator of a country's overall economic health. A rising GNP often indicates a growing economy, whereas a falling GNP might suggest economic downturns. It's crucial for assessing the total economic output and can be used to compare the economic performance of different nations.

inflation adjustments

Inflation adjustments are critical in economic analysis because they allow us to compare monetary values from different time periods in a meaningful way. Inflation affects the purchasing power of currency, so unadjusted figures can be misleading when comparing economic data from different years.

By adjusting for inflation, we convert nominal values (these are the current prices) to real values. Real values account for how prices change over time, giving us a clearer picture of true economic growth or decline. This is especially important in long-term financial planning, investment analysis, and government budgeting.

Price Level Index

The Price Level Index measures the average change in prices across the economy over time. It is essential for understanding inflation, which reflects the rate at which general price levels are rising.

• A higher Price Level Index means that prices have increased, indicating inflation.
• A lower index suggests deflation, where the prices of goods and services decrease.

In calculations like Adjusted GNP, the Price Level Index helps to adjust for these changes to provide an inflation-adjusted figure of economic activity, allowing more accurate comparisons over different time periods.

economic indicators

Economic indicators are statistics used to gauge the economic health and performance of a country. They include measures like GDP, GNP, inflation rates, and unemployment rates.

These indicators help economists and policymakers make informed decisions by providing data-driven insights into the economic direction. By understanding these indicators, individuals and organizations can make better financial decisions, ranging from investments to spending. Key economic indicators can also signal upcoming economic changes, allowing for proactive measures to strengthen economic stability.